The digital currency in the eyes of economists – market articles: will there be no leek in the currency circle?

The digital currency in the eyes of economists – Classification: Bitcoin with no place for souls

[Editor's note] Faced with the new challenges of digital currency , economists are divided into two categories, one is scornful, and it is not worth mentioning that digital currency is a speculative bubble; the other is cautiously accepted and begins cutting-edge exploration. As the digital currency grows, more and more economists join the second camp. For this reason, Kay unveiled a series of articles on “Digital Currency in the Eyes of Economists”, which is the most comprehensive review of digital currency literature. In the six aspects of classification, market, exchange, price, risk, and supervision, the global economists' research on the frontier theory of digital currency is summarized, which provides a useful reference for interested researchers. This article is the second chapter of the market in this series of articles, the first one is the classification article , the next one is the exchange article.

The digital currency world has been in existence for 10 years since Bitcoin appeared, and it has also formed a very unique digital currency trading market . Of course, in the eyes of the traditional financial world, 10 years is nothing but a short-lived moment. Digital currency is also in the infancy, and naturally there is no such thing as a convincing theory of digital currency economics.

So researchers began to test digital currency with traditional financial theory that has been tested in the market for decades, the most famous of which is Efficient Markets Hypothesis (EMH). EMH is the cornerstone of modern finance. The effective market hypothesis was deepened and proposed by Eugene Fama in 1970, and Fama won the Nobel Prize in Economics.

Efficient market theory and hypothesis

EMH believes that investors in the market are rational enough to respond quickly to all market information. According to the theory, in a stock market with sound laws, good functions, high transparency and full competition, all valuable information has been timely, accurately and fully reflected in the stock price trend, including the current and future value of the company, unless there is a market. Manipulation, otherwise it is impossible for investors to obtain excess profits above the market average by analyzing past prices.

EMH is one of the representative theories in financial academic circles about the pricing of financial assets and the logic of stock market fluctuations. The effective capital market hypothesis evolved by EMH has three forms:

One is the Weak-Form Market Efficiency. The hypothesis believes that in the case of weak effective, the market price has fully reflected the securities price information in all past history, including the transaction price, trading volume, short selling amount, and financing amount of the stock. The inference is that if the weak efficient market hypothesis is established, the technical analysis of stock prices will lose its effect, and the basic analysis may also help investors to obtain excess profits.

The second is the semi-Strong-Form Market Efficiency. The hypothesis states that prices have fully reflected all publicly available information about the company's operating prospects. This information includes transaction price, volume, profit data, profit forecast, company management status and other publicly disclosed financial information. If investors can get this information quickly, the stock price should respond quickly. It is concluded that if the semi-strong effective hypothesis is established, the use of fundamental analysis in the market will be ineffective, and insider information may gain excess profits.

The third is the Strong-Form Market Efficiency. The strong efficient market hypothesis states that prices have adequately reflected all information about the company's operations, including publicly available or internally undisclosed information. The following inference is made: In a strong and efficient market, there is no way to help investors get excess profits, even for funds and insider. That is to say, the market perfectly reflects all internal and external information, and the bookmaker cannot use any means to earn excess profits caused by information asymmetry.

The most common weak efficient market hypothesis has been thoroughly examined and discussed on all major financial assets, so the academic community began to use the weak efficient market hypothesis to test whether the digital money market is an effective market.

Is the mainstream digital currency market vulnerable?

The first type of economist believes that the mainstream currency market in digital currencies is weak or effective and gradually becomes weak and effective.

Based on the return rate of Bitcoin in 2013-2016, Urquhart (2016) found that the bitcoin market was very ineffective with several measures of statistics, but found that the bitcoin market became more and more effective if the samples were time-divided. Even in the later stages of the data sample, there is an effective market, so the bitcoin market is becoming more efficient.


Wei (2018) made more improvements on the basis of Urquhart: expanding the data period to the latest 2017; research targets from bitcoin to more than 400 other digital currencies; researching liquidity and market effectiveness Sexual relationship. Wei's research shows that Urquhart's prediction that "the bitcoin market is becoming more and more effective" is supported by new data. Most of the alternative digital currency (Altcoin) is not an effective market, and the higher the liquidity of the mainstream currency, its market The more effective, the less volatile. Wei explained that this was mainly due to the results of risk-free arbitrage trading. Tiwari (2018) used a more advanced model and adopted Monte Carlo and Rolling Windows methods, which also proved that the Bitcoin market was weak and effective for most of the time.

Bariviera (2017) uses the sliding window (Sliding Windows) method to dynamically study market effectiveness. He believes that this can better reflect the effectiveness of the Bitcoin market as time goes by, and continues to improve as the market develops. By sliding the time window, Bariviera also studied whether Bitcoin price Daily Volatility and returns have long-term memory of Long Term Memory. He found that the daily fluctuations in bitcoin prices relative to daily returns were not random, but showed a strong trend effect.

The above arguments at least suggest that the digital currency market is somewhat effective. But the second category of economists holds opposing views.

Chu & Nadarajah (2017), after studying the two specific markets BTC/USD and BTC/CNY in 2010-2017, believes that the market is ineffective for most of the time, especially when the price bubble rises and the bubble falls. Invalid, only shows effectiveness during the price stabilization phase.

Cheah et al. (2018) studied the adaptive capability of the bitcoin market after regulatory changes or other external factors, and concluded that the bitcoin market is not purely random, but has some memory inertia. From the return. This suggests that regulatory or external market factors can have long-term and far-reaching effects on bitcoin prices. He therefore concluded that because the bitcoin market is not an efficient market and exhibits a strong memory inertia, it makes the bitcoin markets in each country interrelated, that is, any country’s regulation of the country will pass. The linkage of the market is transmitted to the world, and these effects will be memory, that is, these effects will last for a certain period of time. This helps traders determine how to conduct cross-border arbitrage transactions. Cheah's measurement results prove that the Bitcoin market has a significant system memory inertia, so it is a medium-to-high efficiency market.

Khamis (2018) compared the difference between the bitcoin market and the stock, gold and foreign exchange markets in terms of long-memory and market effectiveness over time. He used the Market Deficiency Measure (MDM) (Wang et al., 2009) to conclude that Bitcoin is the most inefficient market and that stocks are relatively effective. The reason for the inefficiency is the lack of regulation in the bitcoin market. The long-term memory inertia of the price of the bitcoin market suggests that investors can profit from the historical performance of Bitcoin to predict future price movements.


Amaranth grade and extinction

It is of great practical significance to study whether the digital money market is effective.

If the conclusions of the first class of economists are correct, that is, the bitcoin market is more and more effective, we do not need to use technical means to predict the rise and fall of bitcoin. The most convenient way to invest is to buy the bitcoin index directly. .

Recently, many exchanges have started to introduce digital currency index funds, but the trading volume is not too big, and the market does not seem to buy it. Of course, the last thing to buy is the SEC, which has vetoed the Bitcoin ETF application several times in three years. The reason is simple: the bitcoin market is not an effective market, the market is opaque and there is a possibility of being manipulated. The SEC wants to protect the vast majority of investors, so as not to be cut as amaranth through the ETF.

In fact, in the efficient market, amaranth does not exist.

The coin circle circulates an interesting “garden grade harvesting chain”: ordinary digital currency investors are treated as a leek by the project side; the project side is cut by the exchange; the exchange is cut by the market or the strict policy of strict supervision . In a strong and efficient market, technical analysis, basic analysis, and insider information have lost their effectiveness, and there is no amaranth in the currency circle.


However, the stock market can't reach a strong and effective market, and we don't expect the digital currency to reach a strong and effective market stage.

Another type of economist's research on the ineffectiveness of the digital money market has important guiding significance for the digital currency industry, especially for the quantitative investment of digital currency.

For example, the inefficiency of the market leads to risk-free arbitrage opportunities across markets. This kind of opportunity appeared in large numbers from 2017 to the second half of 2018. During this period, arbitrage operations were frequent, and companies and teams called “moving bricks” in the industry have sprung up. As the market matures, from the second half of 2018, there is no profit in moving bricks. The reason is that more traders, especially traders from traditional hedge funds, join the digital currency arbitrage market. To make the entire digital market more liquid, the arbitrage space is gradually compressed.

For example, some scholars believe that digital currency, especially bitcoin, has a strong memory effect, that is, the historical price of bitcoin has a great influence on future prices. Therefore, in the quantitative digital currency investment strategy, trend investment should be one of the most profitable strategies. Scholars' research on the market effectiveness of digital currency under the policy attack can be an important reference for quantifying digital investment risk management strategies.

Of course, research on the digital money market is still in its early stages, and there are a large number of unknown areas that are worthy of further exploration by economists:

First, the performance of the market hypothesis under the new data deserves further study. In particular, after 2018-2019, the digital money market is in a bear market, and the volatility has dropped sharply. It is estimated that the market is more characterized by weak effective market and may even become an ineffective market. What are the reasons for these changes?

Second, in the future, is it possible for the digital currency market to become more effective? What is its internal logic?

Third, the introduction of national policies, especially after the exchanges are legal and legal, will it affect the market effectiveness of digital currencies?

The fourth is the difference in market effectiveness between each country/exchange, and the relationship between each market's effectiveness and liquidity.

In theory, the digital money market is still far from the minimum standard of an effective market. Judging from the current status of the industry, the currency circle is currently unable to eliminate the phenomenon of cutting amaranth.

It is hoped that future researchers will be able to present better research results, help regulators and the industry to make the digital money market more transparent and effective.

The industry is getting healthier and the leek is naturally less and less.

Classification is finished, the previous one: classification articles – the soul has no place to put . The next article of the exchange – the glory of the king, so stay tuned.

=== References: ====

Urquhart, Andrew, (2016). The Inefficiency of Bitcoin (August 24, 2016). Available at SSRN: or

Wei, Wang Chun (2018). "Liquidity and market efficiency in cryptocurrencies," Economics Letters, Elsevier, vol. 168(C), pages 21-24.

Tiwari, Aviral Kumar & Jana, RK & Das, Debojyoti & Roubaud, David, (2018). "Informational efficiency of Bitcoin-An extension," Economics Letters, Elsevier, vol. 163(C), pages 106-109.

Bariviera, Aurelio F. (2017) The inefficiency of Bitcoin revisited: A dynamic approach. Economics Letters, Volume 161, 2017, Pages 1-4, ISSN 0165-1765, 2017.09.013.

Jeffrey Chu, Saralees Nadarajah (2017) Statistical Analysis of the Exchange Rate of Bitcoin

Cheah, Eng-Tuck & Mishra, Tapas & Parhi, Mamata & Zhang, Zhuang. (2018). Long Memory Interdependency and Inefficiency in Bitcoin Markets, Economics Letters, Volume 167, 2018, Pages 18-25, ISSN 0165-1765, https ://

Al-Yahyaee, Khamis Hamed & Mensi, Walid & Yoon, Seong-Min, (2018). "Efficiency, multifractality, and the long-memory property of the Bitcoin market: A comparative analysis with stock, currency, and gold markets," Finance Research Letters, Elsevier, vol. 27(C), pages 228-234.

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